Price Action Patterns
What are price action patterns?
Price action patterns are, as the name suggests, are patterns that can be seen on the charts, created from the up and down movements of the market price as it creates and interacts with structures (support and resistance). These structures can be found and be more defined by connecting the points where the price reversed using a trendline or a rectangle tool.
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How do you draw price action patterns?
To draw price action patterns, first, you would need to have an idea of what they are, and what they look like so that you’ll be able to find them easily, even without using technical analysis. But conveniently, tradingview.com has some tools offered for free that can help you draw and highlight the important structures when drawing a price action pattern.
How to trade price action patterns?
The principle behind trading almost all price action patterns is the same since price action patterns are formed based on (1) price and how it interacts with (2) structures, a trader can either:
- Enter a trade when the structure preventing price from going in the intended direction is being broken (AGGRESSIVE METHOD– Riskier way to trade)
- Wait for the break and retest of the structure that was preventing price from going in the intended direction. (CONSERVATIVE METHOD– safer way to trade)
However, this does not mean a trader should trade every and any price action pattern that is shown on the charts. To help increase the probability of success of when to trade price action patterns, a trader should have certain conditions (criteria), and evaluate the price action pattern in question to ensure that the pattern has fulfilled the condition(s) before being classified as a valid price action pattern.
What are the different types of price action patterns?
Depending on the formation, and to a lesser extent, the current direction of the market (ie: trend), price action patterns are classified as:
- Price action reversal patterns
- Price action continuation patterns
A price action pattern is classified as a reversal or continuation because of the higher probability it has of going in the respective direction. This goes without saying that reversal patterns have a higher probability of price reversing (ie: change in trend) than it is to continue.
NB: For this list provided below, the following are identified as bullish or bearish.
Bearish (sell): Price will reverse and enter a downtrend, as such you would look for only a sell position when trading this pattern.
Bullish (buy): Price will reverse and enter an uptrend, as such, you would only look for buy trades when trading this pattern.
Price action reversal patterns
These price action patterns signify a reversal in price, and to a greater extent, a reversal in trend. Traders tend to use price action reversal patterns as part of their confluence when trading trend reversals.
1. Head and Shoulder (bearish)
This is distinguishable by the three (3) peaks (highs) that price made while in an uptrend usually after approaching or hitting a strong resistance. the first peak is called the “Left shoulder”, while the second peak, which is the highest, is called the head. The third peak is called the right shoulder and is usually in the same price area as the left shoulder.
PRO TIP: Do not look for PERFECTION in the market, it’s illogical to think that both right and left shoulders will reverse at the same price value.
How to trade Head and shoulder price action pattern
In a head and shoulder pattern, there is a support level that traders call the “neckline” which can be identified by looking where each peak (head and shoulders (L & R)) had started to form. This is the area where price retests multiple times to form the head and shoulder pattern and is usually the previous higher low.
After identifying the neckline, wait for the price to break that support, after which you will wait patiently for price to retrace and retest the area. In this case, since the area was a support that was broken, that area will then act as resistance; pushing the price down.
Condition: (1) Price must be in an uptrend. (2) Price is at a resistance (supply zone)
2. Reverse head and shoulder (bullish)
Reversed head and shoulder pattern the opposite of head and shoulder. As such, the same description, as well as the trading methods applies but is reversed. That goes without saying that the neckline, in this case, would be a resistance at the previous lower high and after broken, would be acting as a support, to push price up.
Condition: (1) Price must be in a downtrend. (2) Price is at a support level (demand zone)
Tradingview.com has a special unique “head and shoulder pattern” tool that allows you to draw and highlight the pattern and its neckline more effectively.
3. Double top (bearish)
Double top price action patterns are identifiable by the two peaks (highs) price made before completely reversing. It looks the same as a head and shoulder pattern, except without the head. In other words, think of it as two shoulders. That goes without saying that the peaks of the two shoulders (highs) are in the same price region. (ie: Not the same price, but rather in the same area. One could be higher than the other, but they both reacting to the same structure)
How to trade Double top
The method of trading double top price action patterns is the same as when trading a head and shoulder pattern. ie: Wait for the break and retest of the neckline.
Condition: (1) Price must be in an uptrend. (2) Price is at a resistance (supply zone)
QUESTION: Would you enter a buy trade while price is in a downtrend on the larger timeframe, but just created a double bottom on the lower time frame? If your answer is NO, then congratulations, you are well on your way to becoming a profitable trader. Continue to read on to know why that’s suicidal.
4. Double bottom (bullish)
Once again, since double bottoms are the polar opposite for double tops, the trading methods and descriptions are similar but inversed.
Condition: (1) Price must be in a downtrend. (2) Price is at a support level (demand zone)
5. Triple top (bearish)
As the name suggested, its description is very similar to that of a double top, except it has three highs (peak) in this case. When comparing it to that of a head and shoulder, then the head which would be the highest of the three peaks in a head and shoulder pattern is within the same price range as the left and right peaks.
How to trade triple top
The same methods are applied to trading triple tops as those that are applied to trading double tops. (ie: Breaking and retest of the neckline #support)
Conditions: (1) Price must be in an uptrend. (2) Price is at a resistance (supply zone)
6. Triple bottom (bullish)
The inverse of triple tops as such would only be looking for buy positions when trading this price action pattern.
How to trade triple bottom
Wait for the break and retest of the resistance.
Conditions: (1) Price must be in a downtrend. (2) Price is at a support level (demand zone)
7. Bullish hit and run
Hit and run price action pattern is one of the most underrated patterns and is not often mentioned or spoken of. I doubt many traders even know of said pattern. The pattern is identified by a big push of price causing it to thrust downwards at a much steeper angle. To help know if price is forming a hit and run pattern, just use a trendline to highlight and connect the lower lows (higher highs for an uptrend) When price breaks the trendline, it’s going to do one (1) of two (2) things.
i) Continue to push downward at a steeper angle (upwards if an uptrend)
ii) Break back above/ below the trendline that was recently broken. This is called a false break out.
How to trade Hit and run price action patterns
To trade hit and run price action pattern, first, you need to figure the angle at which price is falling. The best way to do this, as explained above, is to use a trendline to connect the previous low. The angle degree at which price is falling is not important. As long as price stays above the trendline, then you can expect it to respect that trendline the next time price touches it.
However, if the said trendline is broken, then draw another trendline connect its latest lower low, for you to get a different angle at which it is falling. For illustration purposes, your chart should look something like this:
Price cannot continue to fall forever, also, it should fall at a steady paste and reason degree, ideally 45* degree. When (if) price breaks the latest trendline drawn, then you can anticipate price to return to the original and steady degree at which it was falling first. As such, you can trade when price breaks the latest trendline and targets the following trendline.
NB: Bear in mind that this is counter-trend trading, and it’s not recommended for beginners nor traders with adequate experience. To learn how to trade counter-trend properly, then I suggest watching the video below:
Conditions For Hit and Run price action patterns: 1) Price must be in a downtrend. 2) Price must break the first lower trendline to thrust downward. 3) In its downward free fall, price must break the now upper trendline (the one connecting the lower highs). 4) Wait for the retest of the broken trendline.
In this case, price doesn’t always retest the trendline broken, and even if it does, it could mean a continuation of the downward movement, hence why it’s very risky to trade this price action pattern with a lack of experience.
8. Bearish hit and run
Pretty much the same as described above in bullish hit and run. The only exception is that price is an uptrend and breaks the lower trend line (the one connecting the higher lows) in an attempt to return to the usual uptrend angle. Price cannot sustain an 80* – 90* degrees push for too long, as a result, it will exhaust (overheat) and then try to return to a more sustainable degree to continue its onward trend.
Conditions: 1) Price must be in an uptrend. 2) Price must break the first upper trendline to thrust upward at an unsustainable degree. 3) In its “take off to the moon”, price must break the now lower trendline (the one connecting the higher lows). 4) Wait for the retest of the broken trendline.
That concluded reversal price action patterns, having adequate knowledge of the different price action patterns, and knowing how to trade these patterns can increase your edge against the market, as such, gives a higher probability of you being a profitable trader. You have to know every single pattern, but the more the better. Knowing and trading them can allow a trader to enter at the beginning of a new trend, which later on, equals to big profit.
The following however are continuation price action patterns, which give you entry opportunity during a trend.
Price action continuation patterns
Continuation patterns are separate from reversal patterns due to their higher probability of price continuing the trend than it is to reverse.
1. Ascending triangle
Ascending triangle patterns can be identified by their horizontal resistance and upward diagonal support. The price usually has a very hard time breaking the resistance, and would constantly retest that area repeatedly, while continuously making higher lows.
How to trade Ascending Triangle
Trading ascending triangles price action pattern is easy; as mentioned in chapter 7: How to read Forex Market Structure when a structure is broken, the roll is reversed. With that in mind, waits for the break and of the resistance to enter.
Conditions: 1) Price must be in an uptrend. 2) Price must be at a resistance which it touched (approached) numerous times. 3) Price must continue to make higher lows
2. Descending triangle
A descending triangle is a triangular pattern that maintains a horizontal support, while price continues to make lower highs.
How to trade Descending Triangle
Wait for the break and retest of the support that was preventing price from falling further.
Conditions: 1) Price must be in a downtrend. 2) Price must be at a support which it touched multiple times. 3) Price must continue to make lower highs
It is important to wait for the break and retest of the horizontal structure that it stopping price. This is because price can also break the diagonal structure and then reverse. However, this situation occurs less when compared to it breaking the horizontal structure.
Furthermore, tradingview.com offers a unique tool that allows you to simultaneously draw both structures (horizontal and diagonal) at a more precise method.
Video: Trading Descending Triangle price action pattern.
3. Symmetrical triangle
Symmetrical triangles can be formed in either an uptrend, downtrend, or even a ranging market. A pennant can be distinguished by the continuous lower highs and higher lows being created as time passes. Using a trendline to connect the higher lows and lower highs gives a picture as seen below.
How to trade symmetrical triangle
In a symmetrical triangle pattern, the price can go either direction. As such, you would wait for the break of either trendline to know which direction price will go. Please note that for trading symmetrical triangles, price does not always retest the structure broke. Also, it is to be duly noted that price has a higher probability of continuing in the trend its currently in while creating the symmetrical triangle pattern. This means, that if price is in a downtrend, it a higher probability that price will break the lower trendline acting as support to continue going down.
Once again, proving to be the #1 charting website tradingview.com has a symmetrical triangle tool.
This is similar to that of a symmetrical triangle pattern but has longer unequal sides. As with a symmetrical triangle, a pennant pattern can be found in an uptrend, downtrend, but more commonly ranging market. Especially consolidation after a big impulsive move and price is getting ready for another.
NB: After an impulsive move, price can either RETRACE (pullback) or do a CONSOLIDATION (ranging) / SIDEWAY movement.
To the end of the consolidation, price would be making higher lows and lower highs, only to break either trendline as a continuation or reversal of the trend.
5. Cup and handle (bearish)
The cup and handle price action pattern is when price moves in a dome-like shape (cup), to ultimately reverse back to its original starting point of the dome, followed by a push in the opposite direction to form the handle. Cup and handle price action patterns are unique and can take a long time to completely form.
How to trade Cup and handle price action pattern
Trading cup and handle price action patterns can be done in more than one way. Traditionally, traders wait for the handle to done form, and price breaks the upper trendline of the handle as a sign of continuation.
However, a more aggressive method to trade cup and handle is while it’s forming. The dome of the cup shapes like a circle cut in half. In other words, the area where price starts to create the cup is where the cup will end (be completed), and that where the handle will start to form.
While price is creating the cup, it is to be noted that it tends to do some unusually big spike (dip) to and from the circumference of the cup. As such, one of the best places to enter a cup and handle price action pattern is when the price is touching the circumference of the cup while targeting the area where the cup started.
Conditions: 1) Price is in an uptrend. 2) The cup of the pattern is completed. 3) Wait for the break of the upper trendline that is forming the handle of the cup.
For your convenience, tradingview.com again, as an arc tool, as seen in the picture above, that you can use to draw and estimate the circumference of the cup.
6. Inverse cup and handle (bullish)
Looks very much like a cup turned upside down.
Conditions: 1) Price is in a downtrend. 2) The cup of the pattern is completed. 3) Wait for the break of the lower trendline that is forming the handle of the cup.
7. Bearish flag
Flag price action patterns are unique and are one of the most accurate price action patterns that signify a continuation of the trend. They get their name because of how they look, 1) price did a big/ long push (flag pole), followed by 2) an unusual lengthly retracement (flag) that is about half the length of the impulsive move (flag pole).
How to Trade bearish flag price action patterns
trading a flag price action patterns is nothing hard; Since price can retrace back to the start of the previous impulsive move, ie: the lower high (This is a 100% retracement), it hard to know when and where price will end it’s a retracement. As such, you would wait for the completion of the flag, which is signified by the break of the lower trendline. Of course, you would wait for a retest of this trend line.
Conditions: 1. Price must be in a downtrend. 2) Price did an impulsive move, which is followed by a pullback 3. Price breaks the lower trendline on the retracement
Video: Trading bearish flag price action pattern.
8. Bullish flag
As usual, looks like an inverted version of the bearish flag, so no long description is needed.
How to Trade bullish flag price action patterns
Wait for a break and retest of the upper trendline after forming the “flag” of the pattern.
Conditions: 1. Price must be in an uptrend. 2) Price did an impulsive move, which is followed by a pullback 3. Price breaks the upper trendline on the retracement
Is Trading price action patterns profitable?
Forex trading is a numbers game, one that deals with “probability”. As such, you would always put your money in favor of the direction that has the highest probability where market price will go, regardless of what you think or feel.
PRO TIP: Trade what you SEE; Not what you THINK.
More often than not, the price goes in the direction indicated by price action patterns, as such, price action patterns have a high probability of success when use to determine the direction of the market.
As a result, trading price action patterns is a profitable trading strategy.
What is the best type of chart pattern in determining price movements?
There are three commonly know chart patterns that traders use to determine price movement. These are:
- Price action patterns
- Candle-stick patterns
- Harmonic patterns
Price action patterns are explained in detail in this current chapter of the forex course, while forex candlestick patterns are explained in the following chapter. These are the two most important ones; As it regards harmonic patterns, these are not as widely known or use, so they are not mandatory for you to know to trade forex.
With that said, the best type of chart pattern to use to determine price movement is the candlestick patterns when trying to determine if price is going to continue or reverse at a particular area. In addition to that, price action patterns are the best to use to determine the long-term direction of price movement.
How to master price action pattern trading?
To master price action trading, you must first need to have adequate knowledge of what price action patterns are, what they signify, and how to trade them. Because price action patterns are used to estimate the possible direction of the market, adding them to your trading gives you an exceptional edge against the market.
This chapter, in the Rhasfx free forex course, teaches you how to find price action patterns, what they look like, evaluate if they are valid or invalid to trade, and most importantly, how to trade them.
NB: Since this chapter is possibly the longest in the course, it had to be broken into two parts for ease of understanding.
After mastering price action trading, then the next best thing to do is develop a price action trading strategy to add to your confluence trading.
What is a price action pattern strategy?
A price action trading strategy entails trading solely price action patterns. At this point, it is to be noted that price action patterns appear on every timeframe, especially the M15, H1, H4, and D1 timeframe. Additionally, the larger the timeframe, the higher the probability of price going in the indicated direction.
For example, if the m15 shows a double bottom (indicating that price will go upwards), while the H4 just completed a bearing flag pattern, price has a higher probability of going in the direction indicated by the H4.
With that said, when developing a price action trading strategy, the timeframe(s) on which you plan on trading these patterns is taken into consideration. The lower the timeframe, the more often you’ll see a pattern, in addition to that, the less accurate it is. Always remember that in almost every aspect of forex trading, a bigger timeframe triumphs lower timeframes.
Is price action better than indicators?
To some extent, price action is better than indicator, however, if you can tweak the settings of an indicator and find another good compatible match that complements your primary indicator, then the indicators would be considered better than price action in this case.
To summarize, both are good, but it depends on the trader and the strategy the trader is using.